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The risk management team has specialists with backgrounds in the management of credit risk, liquidity risk, market risk, model risk, quantitative risk and systemic risk. These specialists comprise the Financial Risk Management Group (FRM). The various risk functions in FRM operate under the guidance of multiple committees, including the internal Management Risk Committee and the Board Risk Committee.

In performing its role in the financial markets, DTCC undertakes a number of crucial oversight activities, including the assessment of new applicants and the performance of ongoing client and market surveillance. Participation in the Clearing Agency Subsidiaries provides Participants with access to the services the Clearing Agency Subsidiaries offer but also exposes the Clearing Agency Subsidiaries to counterparty exposure. The Clearing Agency Subsidiaries maintain strict membership standards, including minimum financial requirements and Participants are subject to ongoing review following admission. When a new applicant seeks to become a Participant of one of the Clearing Agency Subsidiaries, FRM performs a detailed assessment of the applicant, which includes a review of its organizational structure, management, regulatory oversight, business plan, risk controls and financial position. Based on this review, a recommendation is made as to whether the applicant should be accepted as a Participant. The assessment may be presented to the Management Risk Committee and, in certain circumstances, to the Board Risk Committee, for a final decision. In general, Participants are regulated financial institutions, including broker-dealers, banks, mutual fund companies, investment banks, commercial banks, exchanges and other market participants.

DTCC monitors its credit exposures with respect to the risk that a client defaults through the ongoing surveillance of its financial strength and default risk. On an ongoing basis, clients are required to provide financial and other information to DTCC to ensure that they meet our standards on an ongoing basis. In addition, FRM reviews publicly available information such as earnings releases, equity prices and news as part of its surveillance.

Risk management is the foundation for the trade guarantee that NSCC and FICC provide to their Participants. Their primary mission is to complete transactions on behalf of unrelated sellers and purchasers of securities, notwithstanding the failure of a Participant, thereby reducing risk of loss due to such an event. If a Participant cannot or will not complete settlement, usually due to insolvency, NSCC and FICC will step into the process to complete open guaranteed or novated trades. To that end, NSCC and FICC have to properly identify the exposure presented and calculate clearing fund requirements to cover that exposure using a risk-based margin methodology. NSCC, the Government Securities (GS) Division of FICC and the Mortgage-Backed Securities Division (MBSD) of FICC each maintain a separate clearing fund, consisting of deposits posted by their respective Participants in the form of cash and eligible securities. The clearing fund requirement is calculated using a risk-based methodology that enables NSCC and FICC to identify the risks posed by a Participant's unsettled portfolio and collect additional deposits as appropriate to cover additional exposure. Each Participant’s clearing fund requirement is calculated at least once daily based on risk factors that quantify the market price exposure of each Participant’s unsettled portfolio and are described in NSCC and FICC’s rules and respectively Quantitative Disclosures. NSCC and FICC maintain the authority to collect clearing fund on an intraday basis. For NSCC, the GS Division of FICC and the MBS Division of FICC the aggregate of all such Participants’ deposits is, collectively, the Clearing Fund, which operates as their respective default fund.

The sufficiency of the margin requirements imposed on Participants is assessed primarily through the performance of back tests, i.e., margin requirements collected on a portfolio are compared to the calculated simulated profit and loss on the same portfolio based on actual market moves.

NSCC maintains a liquidity risk management framework for the measurement, monitoring and management of its potential liquidity needs, which is designed to ensure that NSCC maintains sufficient liquid resources to timely meet its payment (principally settlement) obligations with a high degree of confidence in the event of a Participant default. On a daily basis, FRM measures the amount of liquidity that would be required by NSCC in the event that the Participant or Participant family with the largest aggregate liquidity exposure fails to settle (cover 1). NSCC then seeks to maintain qualified liquidity resources in an amount sufficient to cover this risk. NSCC’s liquidity resources include (i) cash in its clearing fund; (ii) cash that would be obtained from NSCC’s committed 364-day credit facility with a consortium of lenders; (iii) supplemental liquidity deposits, which are designed to cover the heightened liquidity exposure, required from those Participants whose activity would pose the largest liquidity exposure to NSCC; and (iv) a default liquidity facility comprised of cash from the sale of commercial paper, extendible notes and term debt to institutional investors.

FICC maintains a liquidity risk management framework for the measurement, monitoring, and management of its liquidity needs, which is designed to ensure that FICC maintains sufficient liquid resources to timely meet its payment (principally settlement) obligations with a high degree of confidence. On a daily basis, FRM measures the amount of liquidity that would be required by FICC in the event that a Participant or Participant family of the GS Division or MBS Division with the largest aggregate liquidity exposure fails to settle (cover 1). FICC then seeks, if possible, to maintain qualified liquidity resources in an amount sufficient to cover this risk. Liquidity resources for the GS Division and MBS Division each include (i) cash in its clearing fund; (ii) cash that would be obtained from repurchase transactions using the securities held in its clearing fund; and (iii) cash that would be obtained by entering into repurchase transactions using the securities that would have been delivered to the defaulting Participant had it not defaulted. In addition, the GS and MBS Divisions would trigger its respective Capped Contingency Liquidity Facility® for additional liquidity in the event its primary sources of liquidity are inadequate or unavailable.

DTC is not a central counterparty (CCP) and does not guarantee settlement. It operates a modified delivery versus payment model subject to risk management controls structured so that DTC will have sufficient liquidity resources to achieve net funds settlement despite the failure to settle of its largest Participant family. The risk management controls in place for valued transactions processed through the facilities of DTC - collateralization and net debit caps - are based on guidelines established by the Federal Reserve Board (FRB) for book-entry securities systems that settle over Fedwire and on global standards. Collateralization is designed so that, if a Participant fails to pay its settlement obligation, DTC will have collateral sufficient to cover that obligation. The net debit cap is designed so that no Participant can accrue a net debit balance in excess of liquidity resources available to DTC for net funds settlement in case of the failure to settle of DTC’s largest Participant family. The net debit cap of a Participant is established based on its transactional activity, always subject to liquidity resources available to DTC. DTC maintains an all-cash participants’ fund, which is a liquidity resource for settlement and is also available to satisfy any loss incurred by DTC, including a loss resulting from the failure of a Participant to pay its settlement obligation. DTC also maintains as an additional liquidity resource for settlement a committed 364-day credit facility with a consortium of lenders.

The risk management controls are described in DTC’s rules and Principles for Financial Market Infrastructures Disclosures.

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